May 17, 2022
The judgments of the Supreme Court (of 21 October 2021) and of the Paris Court of Appeal (of 23 June 2020) in Kabab-Ji SAL (Lebanon) v Kout Food Group (Kuwait) ([2021] UKSC 48 and No. 17/22943), have been hailed as providing clarity on the law applicable to an arbitration agreement. They certainly do, if one considers each jurisdiction separately. Taken together however, the picture is more confusing since each court reached diametrically opposed conclusions; and in so doing illustrated some fundamental differences in approach. Perhaps that would not matter if arbitration were a purely domestic process, but it is not. So the case also raises the practical question of how parties should address the legal culture clash.
The facts can be shortly stated. On 16 July 2001 Al-Homaizi Foodstuff Co WWL (“AHFC”), a Kuwaiti company operating various fast-food franchises in Kuwait, signed a franchise development agreement with Kabab-Ji SAL (Lebanon) (“Kabab-Ji”), a Lebanese company specialising in fast-food. Under this agreement AHFC was to operate a chain of “Kabab-Ji” branded outlets in Kuwait for a period of 10 years. In addition the franchise development agreement provided that on the opening of each outlet AHFC and Kabab-Ji were to sign a specific agreement relating to the operation of that outlet.
The franchise development agreement (FDA) and the outlet operation agreements (together the “Agreements”) stated that they were governed by English law. They contained identical arbitration clauses which provided for ICC arbitration, with the seat in Paris. The FDA also contained a “no oral modification clause”, i.e. a provision to the effect that the agreement could not be amended or modified except in writing executed by both parties.
On 2 October 2004 AHFC informed Kabab-Ji that it was restructuring the group and that a Kuwaiti holding company, which became Kout Food Group (Kuwait) (“KFG”), was to be established and would become its parent. On 7 October 2004 Kabab-Ji gave its consent to the creation of KFG on the condition that the restructuring would not affect the terms and conditions of the Agreements. The restructuring duly went ahead.
On 16 July 2011 the Agreements expired without the parties’ expressly having agreed to renew or extend them.
In 2015 a dispute arose between Kabab-Ji and KFG which led Kabab-Ji to initiate arbitral proceedings before the ICC against KFG under the arbitration clauses.
On 11 September 2011 the tribunal issued its award, with one member dissenting. The award ruled that given Paris was the seat of the arbitration, French law applied to the arbitration agreements and therefore French law was to be applied to determine whether KFG was a proper party to the arbitration. The tribunal found that as a matter of French law KFG was a party. The tribunal also awarded Kabab-Ji damages totalling some US$6 million and interest.
Following the issue of the award KFG brought an action in the French courts to annul the award on the ground that English law applied to the arbitration agreement and that therefore the arbitral tribunal had had no jurisdiction over it. The annulment action was ultimately heard by the Paris Court of Appeal on 23 June 2020, which dismissed it; of which more below. KFG has lodged an appeal before the Cour de Cassation, effectively the supreme court in civil matters. The Cour de Cassation has yet to give judgment.
However, in the meantime, in March 2019 Kabab-Ji started proceedings in England to enforce the award under the New York Convention. It was resisted by KFG on the grounds – essentially – that English law applied to the arbitration agreement and that therefore it was not a party to the arbitration.
At first instance it was held that the law governing the arbitration agreements was English law, and as a matter of English law KFG had not become a party to those agreements. However, the judge adjourned any further hearing until after the Paris Court of Appeal had heard KFG’s application to annul the award. The decision was appealed to the Court of Appeal. On 20 January 2020 it held that English law governed the arbitration agreements and as a matter of English law KFG was not a party to them. It also held that the judge should not have granted an adjournment and gave summary judgment refusing the recognition and enforcement of the award. The decision was appealed to the Supreme Court.
The Supreme Court gave judgment on 27 October 2021. It considered that there were three issues:
- Which law governed the arbitration agreements?
- If English law governed, was there any real prospect at any future hearing that a court would find KFG had become a party to the arbitration agreements?
- Was the Court of Appeal justified in giving summary judgment refusing recognition and enforcement of the award?
On the first issue, the Supreme Court noted article V(1)(a) of the New York Convention provided that the validity of an arbitration agreement was to be determined “under the law to which the parties have subjected it or, failing any indication thereon, under the law of the country where the award was made.” The question was therefore whether the arbitration agreements had been made subject to a law by the parties; or whether the parties had failed to indicate a law, in which case the default position would apply. This in turn would lead to the application of French law.
The Supreme Court referred to its reasoning in Enka Insaat Ve Sanayi A.S. v OOO Insurance Company Chubb [2020] UKSC 3. Although that case concerned the validity of an arbitration agreement before the arbitration had taken place, and so did not concern the enforceability of an award under the New York Convention, the Supreme Court considered that the reasoning nonetheless applied. In Enka the Supreme Court had concluded that where the law applicable to an arbitration agreement is not specified, the law governing the contract of which the arbitration agreement forms a part will generally apply. The choice of a country with a different law as the seat of the arbitration was, without more, not sufficient to negate that conclusion. Given that Agreements were governed by English law, it followed that the arbitration agreements were also governed by English law.
As to the second issue: the claimant sought to argue that KFG became a party to the arbitration agreements by becoming a party to FDA, or that the FDA had been novated by reason of the parties’ conduct. However, given the no oral modification clause and the absence of any agreements in writing making KFG a party to the FDA or novating the FDA, KFG had not become party to the arbitration clause in FDA. It followed that there was no realistic prospect that a court would find KFG had become a party to the arbitration clause.
As for the grant of an adjournment pending the outcome of proceedings before the French courts, this had not been justified. The French courts apply French law and their decisions are not binding on the English courts. There had therefore been no risk of inconsistent judgments or an issue estoppel being created.
Turning now to the judgment of the Paris Court of Appeal, KFG essentially made three submissions:
- English law governed the arbitration agreements.
- Even if French law governed the arbitration agreements, it was not bound by the arbitration agreements because AHFC’s rights under the arbitration clause had not been transferred to it?
- The arbitration clause had not been extended to cover KFG because the substantive rights and obligations under the Agreements had not been transferred to it.
On the first submission the Paris Court of Appeal held, following well-established principles of French law, that an arbitration agreement is legally independent of the underlying contract in which it is included, directly or by reference. The existence and validity of an arbitration agreement is to be interpreted according to “the common will of the parties, without the need to refer to any national law”, subject to mandatory rules of French law and international public policy. Given the separability of the arbitration agreements contained in the Agreements, it did not follow from the fact that the Agreements were governed by English law that the arbitration agreements contained within them were also governed by English law. On the contrary, the parties had chosen Paris as the seat of the arbitration. It would therefore be the French courts, applying French law, which would hear any actions concerning the arbitration and any award. The parties’ common intention was therefore that French law should apply to the arbitration agreements.
On the second submission the Paris Court of Appeal held, again following well-established principles of French law, that a non-signatory to an arbitration clause may be made a party to an arbitration pursuant to it if the party had “the will to participate in the performance of the agreement”. KFG had clearly expressed a will to participate in the Agreements, having actively participated in their performance, e.g. by having presented itself as franchisee, by having paid royalties and by having been involved renegotiations of the Agreements. It followed that KFG was bound by the arbitration agreements contained in them.
As to the third submission, the Paris Court of Appeal considered that it was incompetent to decide it. It would require an investigation of the facts which was beyond the powers of a reviewing court being asked to annul an arbitral award.
As an English lawyer it is easy to be critical of the reasoning of the Paris Court of Appeal.
Starting with the law applicable to the arbitration agreement: Why should an arbitration agreement be separate from the commercial agreement of which it is a part? It is agreement to arbitrate disputes under that commercial agreement and so surely part and parcel of it. And as such, an agreement by the parties that a particular law should apply to the commercial agreement is surely an indication – in the absence of any indication to the contrary – that the parties wish that law to apply equally to the arbitration clause contained in it. The parties’ indication of a particular seat is surely no more than just that.
A French lawyer a might reply that it makes perfect sense to treat the arbitration agreement as separate from the commercial agreement. Commercial rights and obligations are clearly different from the obligations entailed by arbitration. The former are informed by a commercial rationale where the parties bargain with each other. An agreement to arbitrate on the other hand is an agreement to submit to the jurisdiction of a third party alien to the contract – the arbitrator – whose decision may have a profound impact on the parties’ positions. The choice of a seat is a clear indication by the parties of the law which is to apply to the conduct of the arbitration. It is artificial to split off the law applicable to the arbitration agreement which gives rise to the arbitration in the first place from the law of the seat.
As to the Paris Court of Appeal’s reasoning on the second submission, an English lawyer would no doubt point to the existence of the no oral modification clause in the FDA as a solid foundation for the conclusion that KFG had not become a party to the arbitration agreements. But as a matter of principle, if a party has evinced an intention to be bound by the commercial agreement to which the arbitration agreement relates, it surely makes sense for that party to be bound by the arbitration agreement. English law prides itself on focusing on substance rather than form and eschewing unnecessary formalities. In India for example the Supreme Court recently held (on 27 April 2022) that a non-signatory company in the same group as the signatory company, where there is corporate and functional unity between them, could be party to the arbitration agreement (Oil and Natural Gas Corporation Ltd. v. M/s Discovery Enterprises Pvt. Ltd. & Anor, Civil Appeal No. 2042 of 2022.). There is of course also section 8(1) Contracts (Rights of Third Parties) Act 1999 under which third parties may enforce and be bound by arbitration clauses in contracts which purport to confer a benefit on them.
What practical conclusions may be drawn from this clash? As lawyers usually advise, it’s better to put it in writing. That is to say, the first, and perhaps most obvious conclusion, must be that if the parties choose a seat in a jurisdiction which applies a different law from that which applies to the commercial contract they should make clear which law they wish to apply to the arbitration agreement. Second, if it is desired that a third party, not party to the original commercial contract, should be bound by an arbitration clause contained in it, then written agreement should be obtained.
Charles Marquand is a Chartered Arbitrator and Fellow of the Chartered Institute of Arbitrators. He is on the arbitration panels of the London Metal Exchange, the Minor Metals Trade Association, the Chartered Institute of Arbitrators and the ICC. He has extensive experience of arbitrating commercial disputes, often with an international dimension, as a sole arbitrator and as a member of a tribunal.
